These Are 2 Methods to Paying Off Your Student Debt

Although They Are Different, It Doesn’t Mean One Is Right and One Is Wrong

If you’re on the path of tackling your student debt or if you’re looking to begin, there are some things you want to keep in mind. There are a couple methods to figuring out which is the right way to tackle your student debt.

Do you want to pay as little as possible overall?

Do you want be done with them as soon as possible?

Or, would you rather have a combination of both?

No matter what, each method will get you to the same endpoint: no more student loans. However, whichever option you choose, just know that each has a different outcome overall. Below are a couple methods on how you can go about eliminating student loans from your life with the pros and cons that come with them.

Snowball Effect

The Snowball Effect was popularized by a well-known personal finance guru, Dave Ramsey. This strategy was coined “snowball” for the exact reason on how a snowball can get bigger and bigger while gaining momentum. If you have ever rolled a snowball down a snow-covered hill, you know exactly what I mean. At first, the snowball is small and rolls slowly. Give it a little time and you can see the magnitude of that snowball. It is now much bigger than how it started and the speed at which it rolls continues to increase.

Taking on this strategy in terms of debt has the same effects.

The idea is, is that you tackle your smallest debt first. No matter what the interest is, you need to find the smallest principal loan and put all of your efforts towards it (ensuring you are still making the required minimum payments on all other loans). Any extra dollar you can scrounge up will only hasten the elimination of this first loan (just like packing a little more snow on that beginning snowball).

The real momentum happens once you finally pay off that first loan. Once it’s gone, all the interest you were paying on it can be added to the amount you put towards the next smallest loan. So if you were paying $200/month to get rid of the first loan and after a few months it was gone, you start putting that $200 towards the next one. The momentum comes from the interest you are no longer paying for the first loan (ex. $25/month). Now, you add the $25 you were paying to the $200 and your new monthly payments are $225/month.

You keep this going with every loan you have left- maintaining the smallest to biggest strategy.

Once you get to your final loan, you could be putting $500-$1000/month towards it and it can be gone faster than you think. All the money you ‘save’ from not paying interest on the smaller loans adds to the velocity on tackling the bigger loans.

Pros:

Mentally, this method keeps you pursuing the end game. With each loan eliminated, you are driven to tackle the next with more dedication and tenacity.

Obliterates debt much faster than maintaining balanced payments across the board.

Cons:

Total interest accrued can equate to more than other methods of paying off debt.

The Ladder Method

The Ladder Method is different from the Snowball Method. In this strategy, you attack the loans with the highest interest rate first. For those that are strong in math and are $ conscious, they cater more towards the Ladder Method as you pay less overall by the time your loans are gone.

With this strategy, you put all of your efforts to the loan with the highest interest rate (no matter how small the principal). The reason you target the highest rate is because of compounding interest (having interest build on interest already accrued). Once you pay off the higher rates, the loans with the lower rates seem to 'grow' much slowly and are easier to tackle. Here’s an example:

$10 Loan @ 20% interest for 3 months.

Vs.

$20 Loan @ 5% interest for 3 months.

In the first example, if you had a $10 loan (20% monthly interest) for 3 months and made no payments, your total loan would then equate to $17.28. You would have racked up $7.28 due to the interest rate. That’s almost double your original amount of $10.

Month

Loan Amnt

Interest

Interest Accrued

0

$10.00

20%

$2.00

1

$12.00

20%

$2.40

2

$14.40

20%

$2.88

3

$17.28

<Totals>

$7.28

In the second example, you would only accrue $3.15 in total interest. Even though the loan amount initially was bigger, over time the second loan will be smaller than the first loan due to compounding interest between the both of them.

Month

Loan Amnt

Interest

Interest Accrued

0

$20.00

5%

$1.00

1

$21.00

5%

$1.05

2

$22.05

5%

$1.10

3

$23.15

<Totals>

$3.15

After 5 months, the first loan (original $10) would come out to equal $29.47. Whereas the second loan (original $20) would equate to only $27.62.

This is why mathematicians and those who are money focused choose the Ladder Method when paying of their debts. You save more money in the grand scheme of things.

Pros:

This method will keep the most money in your pocket at the end. Eliminating the highest interest rates first prevents interest accruing on interest.

Has its own anti-snowball effect. Once you get rid of the higher interest rate loans, the size of your remaining loans doesn’t grow as fast as you are not accruing interest on interest.

Cons:

Can be mentally discouraging. The highest % interest rates can be tagged to the biggest loans which can take longer to get rid of. If you think about going to the gym and don’t see the results after the first few visits, you get discouraged on continuing to go. The same applies to loan repayment.

Which Method Is Best for You?

Either method works. They both ultimately reach the same outcome: debt free. The only things to really consider are:

1) Do you mind paying more money overall, but enjoy/relish seeing your loans being knocked out one by one?

2) Do you want to keep as much money in your pocket, but need to not get discouraged right away?

It all comes down to your personality and how you want to look at your loans. If you need that immediate gratification and continued palpable motivation, then swing more towards the Snowball Method. If you can persevere and display patience, the go with the Ladder Method. Only you know which method is right for you. It’s just great that you’re choosing one in the first place. Good luck!

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